Investing for Canadian Beginners

When you’re new to the world of investing, it’s tough to know where to begin. Do you pick your account first — or your broker? Do you take the DIY route or opt for an automated service? And how are you supposed to know what kind of investments to pick?

Beginners investing in Canada should start the process by exploring the basics:

1. Learn the difference between saving and investing.
2. Figure out how much you want to invest.
3. Pick a strategy that’s right for your financial goals.
4. Review your investment options so you can build wealth with confidence.

Investing 101: What is investing?

Investing is the act of committing your money to something in the hopes of getting back more than what you put in. You can invest in all sorts of things — businesses, real estate, stocks and other asset classes — but none of these are guaranteed ways to make money. Businesses fail, markets shift, and stocks can lose value. That’s why investing is risky.

More than three-quarters (77%) of Canadians have investments, according to a BMO Financial Group study[1], and one of the easiest ways to invest is through a dedicated account you use exclusively for your assets. These accounts are available through financial service providers called brokerages. All of the biggest banks in Canada are registered investment brokerages, but you can also invest through third-party brokers.

Saving versus investing

Saving and investing aim to build a financial safety net but approach the goal differently. When you save, you’re putting money away somewhere safe so you can use it sometime in the next few years. When you invest, you’re buying an asset and accepting some risk in the hopes that it will increase in value.

For example, the money you put in a savings account has a guaranteed interest rate, which means that any funds you deposit will earn money, no matter what. Savings accounts interest rates are variable, so the rate at which your money grows may fluctuate — but it’s still guaranteed. Plus, you don’t run the risk of losing what you deposit. Investments, on the other hand, rarely come with a guarantee, so there’s no way to know if you’ll turn a profit — and there’s a chance you could lose some or all of the money you invest.

So, why not stick to savings accounts? Well, the average rate for high-interest Canadian savings accounts in 2022 is 1.29%, according to NerdWallet analysis. And the total return of the S&P/TSX Composite Index, which broadly represents the Canadian stock market, averaged 8.68% over the last ten years. That 7.39% difference in profit is your potential reward for taking an investment risk.

You can see the real impact when considering how most Canadians use their tax-free savings account (TFSA). According to BMO’s 2022 annual savings study[2], more than half of Canadians (63%) have a TFSA, but most of these accounts (56%) hold uninvested cash. In some cases, cash makes up over 75% of account holdings. Now, that may not seem particularly noteworthy — isn’t cash what savings accounts are for? Well, yes. But TFSAs are capable of holding investments and cash. Only about half of Canadians (49%) know this — the rest are missing out on some serious tax-free earning potential.

Tucking funds into a savings account means guaranteed interest, but investing may offer exponentially higher returns. That said, investing won’t be right for everyone. There are a few factors beginners should consider before they start investing.

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What to consider before you invest

If you’re new to the world of investments, here are three questions beginners should consider:

1. Do you have high-interest debt?

Not all types of debt are created equal. From 2019 to 2021, variable and fixed-rate home loan interest rates in Canada ranged from 1.46% to 5.58%[3]. Compare that to the average interest rate for a Canadian credit card, which is 19.4%, according to NerdWallet analysis, and you begin to see just how widely debt interest rates can vary.

Carrying high-interest debt, like credit card debt, can wipe out the money you earn on your investments.

For example: let’s say you invest $100 and one month later, your investments generate a 10% return. You’re now $10 richer. Except you also happen to owe $1,000 on your credit card, which carries a 20% interest rate. Your investments brought in $10, but you just generated $16.60 of interest on your credit card, transforming your $10 gain into a $6.60 loss.

Not all debts cost the same. You don’t need to be debt-free to start investing, but take stock of any debts owed and prioritize paying down high-interest debt before opening an investment account.

2. Do you have an emergency fund?

An emergency fund holds money earmarked for unexpected expenses, like car repairs or sudden job loss. Many financial experts suggest saving three to six months of living expenses, but any amount helps, especially when you’re starting out.

Establishing an emergency fund before you start investing may provide some peace of mind. Because even if your investments perform poorly, you have a monetary safety cushion in place to fall back on.

3. Do you have money you can afford to lose?

While some investments are riskier than others, no investment can guarantee profit. Money invested should be money you’re willing to lose — in part or entirely, as both are possible.

Plus, some lower-risk investments, like bonds and guaranteed investment certificates (GICs), require you to set aside your funds for months or years at a time. Money invested should be money you’re willing to leave untouched for some time.

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Pick your investment strategy

Before you can learn how to start investing, you’ll need to explore some potential investment strategies. An investment strategy guides your decisions and can help you determine how to assemble a collection of investments: an investment portfolio.

Investment strategies can be broadly divided into three options:

1. Investing with a financial advisor.
2. Investing with a robo-advisor.
3. Investing on your own.

Each path offers a distinct set of perks and drawbacks.

Financial advisor: Hands-off investments managed by a human

If you’d prefer to park your investments with a professional, a financial advisor may be the way to go. Investment management services — sometimes called wealth advisory services — are offered by all of the major financial institutions in Canada. With this strategy, a financial advisor builds and manages your investments on your behalf.

This strategy is best for investors who don’t want to manage their own investments and prefer the human touch of a financial advisor.

Robo-advisor: Hands-off investments managed by an algorithm

Some brokerages offer access to an automated investment service called a robo-advisor. Despite the name, this service isn’t administered by a robot, but it is made possible by sophisticated investment algorithms.

Here’s how it works:

1. First, you fill out an online application to open an account.
2. Next, you answer a series of questions about your financial goals and how much risk you’re willing to take with your investments.
3. Then, the robo-advisor puts together a portfolio on your behalf based on your questionnaire responses.
4. The robo-advisor uses complex algorithms to monitor your account, moving investments in and out of your portfolio according to your financial goals. This technique is called portfolio rebalancing.

This strategy is best for investors who don’t want to manage their own investments and feel comfortable entrusting their money to a digital service.

Self-directed: Pick your own investments

For those that want full control over the investing process, self-directed investing, or DIY investing, may be the best way to go. This approach involves opening an account with an investment brokerage and putting together a portfolio of your choosing. You’ll also be solely responsible for monitoring your investments and making adjustments over time as needed.

This strategy is best for investors who want to manage their investments firsthand and don’t mind the extra homework that often comes with managing a portfolio solo.

Nerdy tip: By the way, you’re not locked into just one investment strategy. You can have multiple investment accounts with different brokerages and are free to experiment with other techniques as you see fit.

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How much do I need to start investing?

Whether you have $100 or $10,000, how much you need to start investing largely depends on the type of investment service you use (if any) and what types of investments you put in your portfolio.

Many brokerages in Canada don’t have account minimums, which means beginners can start investing with any amount. There may be other minimums to contend with, though.

For example, some wealth management services in Canada impose portfolio minimums, which means you need to have a minimum amount available to invest through the service.

Another common minimum that investors bump up against is minimum investment amounts for certain types of investments, like mutual funds. You typically need at least $500 to invest in a mutual fund.

Nine types of investments

What you put in your portfolio matters because it impacts your potential for profit and loss. Investments, also called assets, come in many shapes and forms:

1. Stocks. A stock is a slice of ownership in a company, also called a share, that is bought and sold by investors on a stock exchange.
2. Exchange-traded funds. Also called ETFs, these funds combine the funds of multiple investors to invest in a basket of assets — typically stocks and bonds.
3. Mutual funds. These funds also pool investor funds and hold multiple investments. Unlike ETFs, mutual funds are often actively managed by a fund manager. Mutual funds are the most popular (42%) asset in Canadian RRSPs.[1]
4. Bonds. A bond is a lump sum loan from an investor to a company or government that earns interest and is paid back over a set length of time. Bonds are a popular type of fixed-income investment.
5. Derivatives. These assets derive their value from another asset’s volatility, like the price movement of a stock. The two most common types of derivatives are options and futures.
6. GICs. Guaranteed investment certificates are similar to bonds: you lend your money to a financial institution for a set period of time in return for your investment back, plus interest, at a later date.
7. REITs. Real estate investment trusts are companies that own real estate. You can invest in REITs by purchasing shares — just like a stock.
8. Forex. The foreign exchange market, or the FX market, allows investors to buy and sell international currencies.
9. Crypto. The cryptocurrency market lets investors buy and sell digital currencies.

How to invest in stocks

Stocks are a popular investment. In fact, they’re the second most popular asset following mutual funds[1]. Learning how to invest in stocks comes with its own challenges and rewards, so stocks tend to be one of the riskier investments for beginners.

If you’re keen to learn the stock trading ropes, do your research and carefully vet any company you intend to invest in. Take a look at its financial records, stock performance and how it fares against major competitors before you buy shares.

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Canadian investment account options

Canadian investment accounts can be broadly lumped into two categories: registered and non-registered.

Registered investment accounts

Registered accounts are offered by Canadian government programs and come with tax benefits — although your deposits and withdrawals are limited.

Examples of registered investment accounts include:

• TFSAs. Tax-free savings accounts can hold cash and investments. Investment gains are tax-free but contributions are limited. The annual contribution limit for TFSAs in 2022 is $6,000. See our picks for the best high-interest TFSAs in Canada.
• RRSPs. Registered retirement savings plans help you save for retirement. Contributions to an RRSP are tax-deductible but you can only contribute 18% of your income up to the annual RRSP limit, which is $29,210 in 2022. See our picks for the best high-interest RRSPs in Canada.
• RESPs. Registered education savings plans save for a child’s higher education. Money grows tax-deferred in an RESP and funds become available when the beneficiary attends post-secondary education.

Non-registered investment accounts

Non-registered accounts, like cash and margin accounts, aren’t affiliated with any government programs and don’t have any contribution limits or tax advantages.

Examples of non-registered investment accounts include:

• Cash accounts. These basic accounts let you buy and sell investments with whatever cash is available in the account.
• Margin accounts. These accounts allow you to borrow money from your brokerage to buy investments. Money borrowed must be paid back with interest, like a credit card.

How to compare investment brokerages

Once you have a strategy and investment account in mind, it’s time to pick your brokerage.

You can open an investment account with all of the major financial institutions in Canada, but there are also third-party brokers that shouldn’t be overlooked. These dedicated brokers don’t have the affiliated financial products and services of their big bank counterparts, but that may not matter if all you’re looking for is a dedicated investment account. In fact, some third-party brokers may have lower fees and better research tools than their competitors.

When comparing brokerages, investigate the account options and available investments. Check out whether the brokerage offers customer support. Read investor reviews published by the Better Business Bureau, Trustpilot and Reddit. Make sure they are Canadian Investor Protection Fund (CIPF) members and that your investments will be protected. You’ll also want to pay attention to investing fees because they can have a big impact on your profitability.

Investing fees and why they matter

There’s no such thing as a free lunch, and investing is no exception. Automated investing services, like robo-advisors, often charge a percentage-based annual fee that typically ranges from 0.25% to 0.70%.

And if you plan to buy and sell investments frequently, be on the lookout for commissions, which are fees triggered each time you make a trade. Commissions from Canadian brokerages are common, and most charge between $4.95 to $9.99 per stock trade.

Fees matter because they detract from your bottom line — just like credit card interest. The higher the fee, the less you profit.

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How investments are taxed

You may need to pay taxes if your investments perform well and make money, also called a capital gain. Any time you sell an asset for more money than you paid to buy it — that’s a capital gain. And the Canadian Revenue Agency will likely take a cut of the profit.

Capital gains tax only applies to half (50%) of the capital gain amount. So, if you bought a stock for $1,000 and sold it for $1,500, you’d generate a capital gain of $500. Capital gains tax would only apply to half ($250) of your capital gain. The amount of tax you owe depends on your tax bracket.

Four investment tips for beginners

Over three-quarters of Canadians (81%) say they’d be concerned for their personal finances if Canada entered a recession, according to a September 2022 NerdWallet survey conducted online by The Harris Poll among 1,116 Canadians. Thirty percent of Canadians say they’d worry about losing money on their investments in the event of a recession, according to the survey.

Worrying about the value of your investments is a concern shared by new and seasoned investors alike. And while there’s no guarantee an investment will make money, there are steps you can take to enter the market on confident footing. Before you dive into investing, consider the following four tips.

1. Start now

The earlier you put your money to work, the better. And that’s because the more time you give your investments to benefit from compound interest, the more money you’ll generate in the long run.

Compound interest needs time to work its magic. And when you’re a beginner investor, getting started with any amount can be beneficial — especially if you get into the habit of reinvesting your investment gains.

Start where you are with what you have. A few bucks a month can help you establish a foothold in investing and become the foundation of your portfolio.

2. Don’t put all your eggs in one basket

You might have heard this adage before, and it applies to investing, too. Buying different types of assets and investing in various industries is a way to spread your money — or eggs, in this instance — across different baskets. In investing, this is called diversification.

Diversifying can help protect your investments from risk and minimize your odds of losing money. How? Because if you funnel all your money into one place — say, tech stocks, for example — you could stand to lose a lot of money if that part of the market starts to perform poorly. But if you spread your money out across different types of investments and industries, you won’t take as big a hit if something loses value. The other parts of your portfolio will help balance out the loss.

3. Know the risks

Not all investments carry the same level of risk. On the lower end of the risk spectrum, you have bonds and GICs. These assets guarantee that you’ll receive your initial investment back. Higher-risk investments include stocks, derivatives, and cryptocurrencies. Mutual funds and ETFs tend to fall somewhere in the middle.

You’ll even encounter varying levels of risk across the same asset class. For example, stocks from new, untested companies are riskier than those from big, well-established companies with proven track records.

Understanding the risks is important for beginner investors, as this information helps inform your investment strategy. Low-risk investments may help your money grow consistently but tend to offer less impressive returns. Higher-risk investments may produce higher returns — but carry a higher risk of loss.

What you put in your investment portfolio really depends on your risk tolerance — how much risk you’re willing to take.

4. Avoid panic selling

Three-quarters of Canadians (75%) say they’ve taken action in response to inflation (i.e. the rising prices of goods and services) over the past six months, according to the NerdWallet survey. Fourteen percent say they’ve reduced contributions to a retirement account and 8% say they’ve sold investments, including stock or crypto.

The market goes through highs and lows; it happens, it’s expected, and it’s often the result of any number of factors, like news headlines, government policy, international events, industry legislation, inflationary pressures and more.

If your investments drop in value, don’t panic. More specifically: weigh your options before you panic sell. Panic selling is dumping investments to get your money out of a market that isn’t performing well. This reaction isn’t usually the best course of action, especially for investors with long-term investing goals.

Dumping everything in your portfolio because you’ve noticed a dip or need to free up cash may cause you to lose more money in the long run, especially if you wind up repurchasing the investments you abandoned in haste. Why? Because the stock market has a strong track record of recovery, and you lock in your losses if you sell when your investments are down. But if you hold onto what you have, your investments will likely recover their value and continue to grow.

Investment terms glossary

• Asset: Something you own that has monetary value.
• Asset allocation: How much money you decide to invest in different types of
  assets.
• Bear market: When the stock market drops more than 20%.
• Brokerage: A company or financial institution that provides a platform for investors to buy and sell investments.
• Bull market: When the stock market rises more than 20%.
• Dividend: A payment made by a company to its investors to share company profits.
• Illiquid investment: An investment that is difficult or time-consuming to sell.
• Leverage: Increasing the size of your investment with borrowed money in the hopes of amplifying your return.
• Liquid investment: An investment that you can sell quickly and easily.
• Return: Money made or lost on an investment.
• Risk tolerance: How much risk you’re willing to take with your investments.
• Stock exchange: A place for investors to buy and sell investments, like stocks and
  funds.
• Volatility: How frequently or dramatically the stock market’s value fluctuates.

Survey Methodology

This survey was conducted online by The Harris Poll on behalf of NerdWallet from September 6-7, 2022 among 1,116 Canadian adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.8 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela at [email protected].

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About the Author

Shannon Terrell

Shannon Terrell is a lead writer and spokesperson for NerdWallet, where she writes about credit cards and personal finance. Previously, she was a writer, editor and video host for financial…

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